There appears to be something of a trend towards "perpetual" or "evergreen" fund structures that are designed to surmount some of the obstacles for accessing more traditional forms of private market investing.
Amid all the talk about how to widen access to private market investing beyond the ranks of big institutions and ultra-wealthy individuals, a word to keep an ear out for more is “evergreen.”
The term, a synonym for “perpetual,” relates to how managers of private equity, credit and other areas are using open-ended funds that offer monthly or quarterly liquidity, subject to caps. Advisors particularly like clients' ability to invest monthly rather than commit episodically based on private market fund closings – making the process smoother and more predictable.
This sort of product, produced at scale and well-diversified, is winning the attention of big institutions, and that sort of mindset ought to appeal to private clients as well, Simon Jennings, managing director and head of HarbourVest Partners’ private client group for Europe and Asia, told this news service in a call. The firm oversees $109.8 billion in assets under management.
“Private clients should have access to the same quality of private markets investments as institutional investors,” Jennings said.
In early July, HarbourVest Partners, a global private markets firm, announced its partnership with AP7, a Swedish government pension fund, as a founder investor in a new private equity strategy. The $835 million anchor investment was made in January this year in a new open-ended evergreen private equity solution designed for non-US institutional and high net worth investors.
The strategy does not have capital calls, or “ramp-up” periods of raising money; there is no “blind pool” where investors commit capital and then wait for general partners (GPs) to put capital to work. The “evergreen” model is transparent, relatively straightforward, and easy to run, Jennings said.
The involvement of a heavy-hitter such as AP7 with HarbourVest is more than just a vote of confidence – it also shows individual investors that large and sophisticated players trust this approach, Jennings continued.
The challenge of illiquidity, and concerns about diversification have been problems for private clients in the past, even though they have heard so much about the merits of non-listed investments, he said. However, about four years ago, the noise level around “evergreen” funds grew, and awareness of this approach is rising.
The evergreen model may help square the circle for regulators seeking ways to widen access to these asset classes without the worry that people will be caught in illiquid assets which they don’t understand, and where demands for cash can suddenly spike. However, Jennings emphasises the importance of ensuring that evergreen funds are positioned correctly as a medium to long-term investment and that investors are clearly and responsibly educated on the liquidity mechanisms, as these vehicles are not suited to everyone.
In the UK in March, the Financial Conduct Authority said it had authorised the LTAF structure. Work continues on tweaking the fine print of how they work and who can access them. At the heart of the matter is that while more firms are staying private or de-listing from public markets, rules about investment suitability for retail clients mean that areas such as private equity, private credit, and venture capital, for example, are largely deemed off-limits. In the US, the Accredited Investor regime is being tweaked. Jurisdictions such as Singapore and Hong Kong are pushing their attractions for types of funds and associated structures, such as Singapore's Variable Capital Company entities, for example. Some of these changes dovetail with moves to encourage family offices to set up in these places, as in Hong Kong.
Typically, private market funds are only available to large institutions. There’s often talk in the wealth space about the need to “democratise” access. However, regulators fear that they will be criticised if a fund blows up and retail clients are hit, causing a political storm. Maybe the evergreen model can change this.
For Jennings, his experience of building and leading UBS and HSBC’s private equity divisions has equipped him to understand how private clients expect and deserve access to an otherwise hard-to-enter market. “I have a passion to deliver solutions in the right way for private clients,” he said.
“In the past, only the large family offices went into private equity, and then private banks created feeder vehicles that went into an underlying fund. That worked very well for some private clients, and they tended to be ultra-high net worth individuals,” he said.
However, penetration rates [those using private investments] was probably, overall, only about 5 per cent, he said.
“Illiquidity was a turnoff for clients, and their investments were not as well diversified as they should be,” Jennings continued.
The evergreen model will potentially open the door for the remaining 95 per cent of those investors who aren’t yet at the private markets party. This is a huge growth opportunity for managers like us, but we must approach it with care and integrity, he added.